40% Of Student Loans Could Default Over 20 Years

America's student loan debt may be approaching a critical point with respect to repayment. According to Student Loan Hero, the total student loan debt has reached $1.48 trillion spread across 44.2 million Americans, and the latest release from the U.S. Department of Education in September of 2017 shows that default rates are climbing. According to the Education Department, the three-year cohort default rate for 2014 rose to 11.5% for federal student loans, up from 11.3% from the previous year.

For any given fiscal year, the term "cohort" refers to all borrowers that entered the repayment period of their student loan within the same time period, and the cohort default rate is the percentage of those borrowers who defaulted on their loans over a given period of time. In this case, the cohort is composed of all students entering repayment between Oct 1, 2013 and September 30, 2014. Since this data reflects a standard three-year default rate, anyone in this cohort who defaulted on student loans before the end of September of 2016 is included in the list.

Essentially, the Education Department release says that 2014 graduates are defaulting within their first three years of graduation at a higher rate than the graduates of 2013 did – but what happens in five, ten, or even twenty years after graduation? What do the default rates look like over longer periods of time?

Using new data released by the Department of Education in October, Judith Scott-Clayton, a non-resident fellow at the Brookings Institution, assessed the long-term data for two different cohorts – the 1995-1996 school year and the 2003-2004 school year. The results are sobering.

Logically, one would expect most borrowers to default in the earlier stages of the loan as they struggle to find jobs and manage their new responsibilities. In later years, as borrowers become more established, the cumulative default rate should begin to level off. Scott-Clayton's analysis shows otherwise.

The cumulative cohort default rate continued to rise steadily over time for both cohorts studied, with the 1996 cohort at a twenty-year default rate of just over 25%. The 2004 cohort has already surpassed that mark, with a default rate above 27%. By assuming the same constant rate of growth in defaults – a reasonable assumption given the 1996 cohort results – 2004 graduates could reach a cumulative twenty-year default rate of 40%.

Why the increase in defaults? Costs are an obvious factor, but Scott-Clayton also finds significant differences in subgroups that are telling – especially with for-profit universities. 2004 cohort borrowers that attended for-profit institutions have a 52% twelve-year default rate (twice that of two-year borrowers at public universities). That statistic is magnified by the fact that for-profit attendees are more likely to borrow in the first place.

Scott-Clayton's conclusions should serve as a wake-up to both students and policymakers. Legislators must work with colleges and universities to find ways to make school more affordable for students, and students must take on no more debt than they need to acquire their degree and manage their debt responsibly.

It's more important than ever to look at your degree as an investment. Are you going to see sufficient return on your investment to pay your debts, or are you likely to be part of a growing default rate? Make your collegiate choices wisely.